Managing the Crisis: The FDIC and RTC
Experience Chronological Overview: Chapter Eightó1985
Newly appointed FDIC Chairman, L. William Seidman, reflected
on his position in the 1985 annual report as follows: “When I became Chairman
in October, the FDIC was in the midst of another year of record levels of
problem and failed banks. . . . These problem and failed banks substantially
the workload in all areas of the FDIC.”
Fund Balance as a Percent of Insured Deposits
number includes $40 billion from Continental National Bank and Trust
FDIC, 1985 Annual Report and Reports from FDIC Division of Finance
and Division of Research and Statistics.Back
Seven banks failed on May 31, 1985, the largest number of insured banks
ever to close in one day (up to that date). L. William Seidman was
appointed chairman of the FDIC on October 21, 1985. Prior to his appointment
FDIC, Mr. Seidman had an extensive career in the financial arena in
both the private and public sectors.
In 1985, the Gross
Domestic Product growth of 3.7 percent was not as strong as the previous
year’s 6.8 percent growth.8-1 Employment growth also slowed a
bit, with a 3.9 percent increase.8-2 The unemployment rate and inflation
held steady at 7.2 percent and 3.6 percent, respectively.8-3 Interest
rates fell after the slight increases in 1984, to a discount rate of
7.7 percent and a 30-year mortgage rate of 12.4 percent.8-4 Home sales
were up 10.2 percent while the number of housing starts held steady.
The office vacancy rate continued to increase to 16.5 percent with
the expansion of commercial real estate markets around the country.8-5
Economic conditions continued to get worse for the Southwest and
its banking industry. A recession began in the agricultural industry.
Southwest bank failures more than doubled to 29 for the year. Agricultural
bank failures peaked at 62 for the year. Those failures were primarily
concentrated in Midwestern states with agriculturally dependent economies
that had experienced farmland price declines of as much as 49 percent
in some areas. Midwest bank failures hit a peak, nearly doubling
the 1984 total, to 56 for the year.
Despite the number of agricultural bank failures, losses to the
deposit insurance fund were relatively low since those institutions
were relatively small. Deposit insurance fund losses in 1985 were
the lowest for the period 1982-1990, totaling approximately $1 billion,
an average of just $8.4 million per bank.
Late in the year, oil prices dropped sharply, to $25 a barrel.8-6
As a result, the oil industry in the Southwest continued to experience
hardships. Conversely, construction in the real estate market was
still booming. In Austin, Texas, the value of new permits for 1985
to 1987 was nearly double the value only a few years earlier. However,
demand for real estate was not keeping up with the supply, as office
vacancy rates in the region’s major cities continued to increase
steadily.8-7 There was an increase in total real estate loans for
the region, reaching the national median. There continued to be drastic
increases in commercial real estate loans to 8.3 percent of assets,
well above the national median of 5.2 percent of assets. The year
1985 marked the beginning of a steady decline in Commercial and Industrial
(C&I) loans for the region after the upsurge during the early
In the Northeast, housing prices continued to rise, including home
prices in Boston, Massachusetts, which rose 34 percent over the preceding
year.8-8 Lending also
increased, with a concentration in real estate loans, both commercial
and residential. C&I loans fell to 7.8
percent of assets after holding steady for four years at around 9.3
percent. The national median was 10.4 percent of assets during that
California also experienced an upward trend in real estate lending,
with commercial real estate loans increasing to around 13 percent
of assets and C&I loans increasing to 21.9 percent of assets,
both well above the national medians of 5.2 percent and 10.4 percent
of assets, respectively. The banking market was also experiencing
an upward trend; over the preceding five years there were 272 newly
chartered banks in California alone.
The number of new bank charters dropped to 344 from 402 in 1984.
The FDIC, the Office of the Comptroller of the Currency, and the
Federal Reserve set a common capital requirement that covered all
banks. Agricultural banks continued a downward slide that had become
quite marked during the latter part of 1984. Although comprising
only 27 percent of all FDIC insured institutions, agricultural banks
accounted for 53.5 percent (62 of 116) of commercial bank failures,
and by the end of 1985, accounted for approximately 37 percent of
the banks on the FDIC’s problem bank list. The number of problem
banks rose to 1,140 from 848 in 1984.
Table 8-2 shows the number and total assets of FDIC insured institutions,
as well as their profitability as of the end of 1985.
Financial Institutions Insured by FDIC ($ in Billions)
Banks – FDIC
Return on Assets
Return on Equity
Savings Banks – FDIC
Return on Assets
Return on Equity
Savings Associations – FHLBB
Return on Assets
Return on Equity
Source: Reports from FDIC Division of Research and Statistics.
Failures and Assistance to Open Banks
the end of the year, 116 banks had failed. There were also
two open bank assistance agreements and two assisted mergers of
savings banks. Total deposits from all failed banks (including
assisted mergers) amounted to $8.5 billion in 1985, compared
with only $2.7 billion in 1984, exclusive of Continental Illinois
Bank and Trust Company (Continental). The states with the most
failures were Kansas, Oklahoma, and Nebraska, each with 13;
Texas and Iowa followed with 12 and 11, respectively.
Purchase and assumption (P&A) transactions were used in 87 of
the bank failures of 1985. The FDIC performed insured deposit transfers
(IDTs) in seven of the failed banks; in one of those, the FDIC made
an advance dividend payment of 50 percent to uninsured depositors
and other creditors. The FDIC conducted payoffs for 22 bank failures.
In four of the payoffs, the FDIC made advance dividend payments ranging
from 45 percent to 50 percent of claims to uninsured depositors and
Two mutual savings banks, Bowery Savings Bank (Bowery), New York
City, New York with $5 billion in deposits and Home Savings Bank,
White Plains, New York, with $405 million in deposits, were assisted
under the Voluntary Merger Plan. In the most noteworthy case, Bowery,
the FDIC formed a financial assistance package to recapitalize the
bank and to facilitate its acquisition by a private investor group.
The Bowery assistance package began in 1984 with a competitive, nationwide
bidding process, in which FDIC insured institutions and other parties
were invited to submit proposals to acquire Bowery. An investor group
submitted the winning proposal, which included a $100 million equity
contribution by the investors and the installation of a new management
team. Bowery was merged into a newly chartered stock savings bank
that retained the Bowery name. A payoff of the bank’s insured
deposits would have cost the FDIC an estimated $620 million, based
on the Bowery’s negative book capital and the market depreciation
in its asset portfolio.
The FDIC also provided open bank assistance (OBA) to two commercial
banks during 1985 to prevent their failures and facilitate their mergers
with sound institutions. The two failing banks were Bank of Oregon,
Woodburn, Oregon, and The Commercial Bank, Andalusia, Alabama.
The Net Worth Certificate Program was due to expire on October 15,
1985, but Congress extended the program to July 15, 1986. By the end
of 1985, the FDIC’s Net Worth Certificate Program included 21
institutions with aggregate certificates outstanding totaling $705.4
A recent estimate of losses per transaction type is shown in Table
Losses by Transaction Type ($ in Millions)
Percent of Assets
Source: Reports from FDIC Division of Research and Statistics.
Payments to Depositors
and Other Creditors
In the 120 banks that failed or were assisted in 1985, deposits totaled
$8.5 billion in 1,254,567 deposit accounts. Bowery alone held $5 billion
in 637,676 deposit accounts. Institutions for the remaining three assistance
agreements held $578.4 million in deposits in 94,478 deposit accounts. The
22 payoff transactions accounted for 45,977 deposit accounts and $287.7 million
in total deposits.
Of the 868 insured bank failures 8-9 since the FDIC began operations in
1934, P&A transactions totaled 475 cases, and there were 373 deposit
payoffs, including 21 IDTs. The FDIC has also provided assistance to 20
troubled financial institutions to prevent their failures since 1981.
Total disbursements by the FDIC since January 1, 1934, amounted to $15.7
billion. Of that amount, the FDIC recovered $11 billion for a net loss
of $4.7 billion.
At the beginning of
1985, the FDIC had $10.3 billion in assets from failed institutions. Despite
handling the failures of 116 commercial banks with total assets of $3.1
billion during the year, the FDIC managed to end the year with total failed
bank assets in liquidation of $9.7 billion.
Approximately one-half of the bank failures in 1985 were agricultural
banks, which meant that many of the assets acquired for liquidation were
farm loans and agriculture-related collateral. At first, the FDIC’s
disposition manual did not cover those types of credits. Therefore, the
FDIC developed an agricultural credit manual describing the planting
and harvesting process that addressed the cyclical nature of farm borrowings.
The depressed agricultural economy in 1985 made it necessary for FDIC
employees to quickly learn the very specialized area of agricultural
loans and credits.
In 1985, the FDIC developed a nationwide automated asset marketing system
with a database containing information on all marketable assets acquired
by the FDIC as receiver. The FDIC also developed an automated investor
profile list, which included local, regional, and national investors
known to the FDIC, along with the types of assets each wanted to purchase
and the corresponding cost range.
In the previous year, 1984, the FDIC had entered into a contract with
a national mortgage servicer to handle quality mortgage loans acquired
from failed banks. That contract provided centralized servicing and enhancement
of loan marketability and pricing. Under the arrangement, the FDIC sold
approximately $100 million in mortgage-backed securities through its
servicer. That was the FDIC’s first major bulk sales effort.
In the fourth quarter of 1985, the Atlanta Regional Office conducted
the first sale of nonperforming loans. It was a small sale conducted
under regional authority, with an approximate value of $1 to $2 million.
Previously, the FDIC would only negotiate with borrowers for settlement
of nonperforming loans rather than offering the loans for sale on the
Table 8-4 shows the FDIC’s assets in liquidation and Chart 8-1
shows the asset mix.
FDIC End of the Year Assets in Liquidation ($ in Billions*)
At the end of 1985, the fund was $18 billion. The fund’s
reserve for losses was increased to $2.3 billion, raising total reserves
to $4.5 billion, including a loss allowance of $1.3 billion for the
1984 assistance agreement with Continental. By the end of 1985, the
FDIC had 7,125
up 2,049 from 1984, due primarily to the hiring of temporary employees,
who represented nearly 46 percent of the FDIC’s staff. Division of Liquidation
had 3,318 employees, an increase of 1,160 over 1984, while Division
of Bank Supervision staff totaled 2,123, up from 1,800. Chart 8-2
shows the staffing
levels for the past five years.
The year 1985 proved to be disastrous
for privately insured savings institutions in Ohio and Maryland.
Seventy-one state chartered savings and loan institutions,
about one fourth of Ohio thrifts, were insured by the Ohio
Fund (ODGF), a private insurance cooperative. In March of 1985,
the ODGF became insolvent after the following series of events:
ESM Government Securities, Ft. Lauderdale, Florida, was
closed amidst fraud allegations on March 4, 1985.
Savings Bank (Home State), Cincinnati, Ohio—the largest
ODGF member with 19 percent of ODGF insured deposits—lost
about $545 million on ESM repurchase agreements.
surrounding Home State’s loss, in turn, caused a depositor
run that exceeded $150 million by March 8, 1985.
On March 9, 1985,
Home State was declared insolvent, setting off a panic
among depositors of other ODGF member thrifts.
On March 13, 1985,
the state legislature established a new deposit insurance
fund for ODGF institutions other than Home State. The
state provided $50 million for
the fund, but continuing heavy deposit outflows caused
the Governor of Ohio to declare a bank holiday two days
later, closing all ODGF insured
On March 20, 1985,
legislation was enacted by the state to require the closed
thrifts to obtain federal deposit insurance; only those
institutions deemed likely
to get insurance from the FDIC or the Federal Savings
and Loan Insurance Corporation (FSLIC) were allowed to
reopen. Other ODGF institutions
were allowed to partially reopen, permitting limited
withdrawals of only $750 per month.
On May 21, 1985,
the Ohio state legislature passed a bill providing $135
million to cover ODGF losses.
ODGF insured depositors did get back their deposits. The
70 ODGF institutions were resolved as follows:
Ten obtained FDIC
Home State) were acquired by healthy banks with federal insurance,
Eight were merged
into other savings and loan institutions with federal insurance,
Three were merged
into banks with FDIC insurance, and
According to officials
of the Maryland Deposit Insurance Fund Corporation, successor to the Maryland
Savings Share Insurance Corporation (MSSIC), the March 1985 events in Ohio,
coupled with the telecast of a story on “60 Minutes” concerning
the failure of an uninsured private bank in Nebraska, caused a “silent
run” on deposits at thrifts insured by MSSIC.8-11In April, federal
officials warned the Governor of Maryland that MSSIC institutions had lost
$375 million in deposits over the previous two months. In May 1985, the
public announcement of a criminal investigation at Merritt Commercial Savings
and Loan (Merritt), Baltimore, Maryland, and newspaper publicity generated
by problems at Old Court Savings and Loan (Old Court), Baltimore, Maryland,
caused depositor runs. Merritt lost $3 million in deposits on a Saturday
morning, and four days later a conservator was appointed for Old Court.
On May 14, a withdrawal limit of $1,000 per month for all MSSIC insured
institutions was imposed by the Governor of Maryland, although exemptions
were later allowed for hardship cases, such as mortgage payments and
payroll payments. The state ultimately assumed responsibility for all
MSSIC insured deposits, and all insured depositors were paid. The final
payment was made to insured depositors in November 1989.8-12 The Maryland
state legislature authorized the issuance of $100 million in state bonds
by the Maryland Deposit Insurance Fund Corporation to pay for the state’s
Both the Ohio Deposit Guarantee Fund and the Maryland Savings Share
Insurance Fund were declared insolvent in 1985. Both states’ governments
passed regulations providing that no member institution could reopen
(or remain open as the case may be) without obtaining federal insurance.
Several depositors were harmed by the limitations on withdrawals of depositor
funds. That practice was in sharp contrast to the way the FDIC handled
depositor funds. The FDIC had more resources to pay all depositors up
to the insured limits and then recoup the funds through asset liquidation
afterwards. The state funds proved to lack the liquidity to withstand
a large concentration of failures.
FSLIC generally tried to dispose of an entire thrift through a sale
or merger, without retaining any assets to manage. As resolutions
difficult due to deteriorating asset quality, FSLIC became the owner
of a huge volume of complex problem assets that acquirers did not
to increase the size of its staff or to hire personnel with the desired
expertise, FSLIC began contracting with private sector firms in 1984
and 1985 to provide the needed expertise and services to manage and
dispose of those assets. Also, FSLIC established its own “thrift” to
manage and liquidate assets of failed institutions; the thrift was
named the Federal Asset Disposition Association (FADA).
The Federal Asset Disposition Association (FADA) was created by
the Federal Home Loan Bank Board on November 1, 1985. FADA operated
as a special purpose, privately held stock corporation, with FSLIC
as its only client.
FADA’s private status enabled it to compete with the private sector
in hiring highly skilled professionals. FADA’s quasi-government status
also exempted it from the disclosure rules of the Freedom of Information
Act and other regulatory provisions that would have made FADA more
accountable to Congress and the public
The FSLIC’s Management Consignment Program was initiated in April 1985
as an interim resolution method to gain control of insolvent thrifts with questionable
managements. The assets and liabilities of insolvent thrifts were transferred
to institutions with de novo mutual charters using a “pass-through receivership.” The
insolvent thrift’s board of directors and senior management were removed.
FSLIC appointed a new board of directors and hired a new management team, usually
by contracting with a healthy institution to provide management services. The
new management team was paid based on a flat fee or fixed salary plus expenses
with no equity incentives. The program functioned much like a regulatory conservatorship,
except that FSLIC contracted management from private industry.
By the end of 1985, 8 liquidations and 23 Assisted Mergers had occurred,
which cost FSLIC a total of slightly more than $1 billion. There were also
10 Supervisory Mergers. The FSLIC fund balance had decreased from $5.6 billion
to $4.6 billion. The Federal Home Loan Bank Board estimated $1.6 billion
as a contingent liability for problem thrifts that would likely require financial
assistance in the near term. That estimate did not project the cost of resolving
all future problem thrifts.
Bureau of Economic Analysis, Department of Commerce. Back
This figure does not include five open bank assistance transactions from
1934-1980. The FDIC did not begin including assistance agreements with
the failures for reporting purposes until 1981. Five assistance agreements,
total deposits of $6.8 billion, should be included in the overall totals.
Back to Text
William B. English, “The decline of private deposit insurance in the
United States,” (Carnegie-Rochester Conference Series on Public Policy,
1993), 68-69, 115-116. Back to Text
Private interview held August 2, 1995, with representatives of the Maryland
Deposit Insurance Fund Corporation, successor to the Maryland Savings Share
Insurance Corporation conducted by FDIC personnel. Back
English, “The decline of private deposit insurance in the United States,” 70,
116-119. Back to Text